California Real Estate Practice Exam

What would prevent the use of a wraparound mortgage by a seller?

1. Acceleration clause

2. Alienation clause

3. Prepayment penalty

4. Due on sale clause

The correct answer is: Due on sale clause

A wraparound mortgage is a type of secondary financing where the new lender assumes the existing mortgage while providing a new loan to the borrower. It allows the borrower to avoid paying off the existing mortgage and instead makes payments to the new lender who will then pay the original lender. However, a due on sale clause prevents the mortgage from being assumed by a new lender, therefore making it impossible to use a wraparound mortgage. An acceleration clause allows the lender to demand full payment of the mortgage if certain conditions are not met, an alienation clause restricts the borrower from transferring the title without the lender's approval, and a prepayment penalty imposes a fee on the borrower if the mortgage is paid off early. While these clauses can make a wraparound mortgage more complicated, they do not directly prevent its use like a due on sale clause does.